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There are at least two good reasons why most investors invest a portion of
their portfolios in small cap stocks:
 | Small-Cap stocks may have better long-term returns than
large-cap stocks.
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| Small-Cap stocks have relatively low correlations with large-cap stocks,
so including them in an otherwise large-cap stock portfolio should improve the
portfolio's risk/return characteristics. |
There are several similar-seeming investment options
available. Which is best?
The funds are listed in rough order of our overall preference.
Preferences are listed separately for use in
retirement accounts and for taxable accounts.
For a listing of our preferences in other asset classes, see
here.
Retirement Accounts (i.e., tax-deferred or tax-exempt accounts)
| Invesco S&P SmallCap Momentum ETF (XSMO).
E/R: 0.37%. This fund attempts to track the S&P SmallCap 600
Momentum Index . This index starts with the S&P 600. It takes
the 20% highest momentum stocks thereof. Then it weights the stocks by
the product of their market capitalization and their momentum score.
This gives a very momentum-y portfolio which might have somewhat less
turnover than one that didn't include market capitalization in its
weighting.
|
| AQR Small Cap Momentum Style Fund (ASMOX). E/R: 0.60%.
This fund invests in small cap momentum stocks (i.e., small-cap stocks that
have done well over the past 12 months, excluding the most recent month).
Momentum has been shown to have both a positive risk premium and a negative
correlation with the value premium. Thus, momentum stocks are good
diversifiers to value stocks. As such, this fund is most appropriate
for those who are using it to both get small cap exposure and to diversify
value exposure elsewhere in their portfolio. This fund is managed to
minimize short-term capital gain distributions. For more
information on momentum investing, see
here.
|
| Invesco DWA SmallCap Momentum ETF (DWAS).
E/R: 0.60%. This fund attempts to track the Dorsey Wright SmallCap
Technical Leaders Index. This index uses a proprietary process
to select small cap securities which demonstrate powerful relative
strength characteristics based on the company's market performance.
For more information on momentum investing, see
here.
|
| Bridgeway Ultra-Small Company Market Fund (BRSIX). E/R: 0.77%.
This fund basically tries to track the CRSP 10 index, which is an index of all domestic stocks whose market
capitalization is in the bottom decile of stocks traded on the New York Stock
Exchange. The fund is tax-managed to minimize capital gains
distributions, but this shouldn't preclude it from being used in a
retirement account. The expense ratio looks high, but isn't,
considering the extreme smallness of the stocks it invests in.
|
| Avantis U.S. Small Cap Equity ETF (AVSC).
E/R: 0.25%. This ETF buys small cap stocks with a tilt towards
profitability.
|
| DFA US Micro Cap Portfolio (DFSCX). E/R: 0.40%. This
fund basically has a strategy of buying stocks of companies whose market
capitalizations are generally in the lowest 5% of total market
capitalization, or companies whose market capitalizations are smaller than
the 1,500th largest US company -- whichever results in a higher market cap
break.
|
| iShares Microcap Index Fund (IWC). E/R: 0.60%. This ETF
tracks the Russell Microcap Index (the 1000 smallest stocks of the Russell
2000 index, plus the next 1000 largest stocks smaller than those in the
Russell 2000 index). We expect the NAV-mkt tracking error to be quite
large for this fund, due to the extreme illiquidity of the
underlying stocks.
|
| First Trust Dow Jones Select MicroCap Fund (FDM). E/R:
0.60%. This ETF tracks the
Dow Jones Select Microcap Index. We expect the NAV-mkt
tracking error to be quite large for this fund, due to the extreme
illiquidity of the underlying stocks.
|
| Vanguard Small Cap Index Fund Admiral Shares (VSMAX). E/R: 0.05%.
This
fund tracks the CRSP US Small Cap Index.
|
| Fidelity Small Cap Index Fund (FSSNX). E/R: 0.025%. This fund tracks the Russell 2000
Index of small US stocks.
|
| Schwab U.S. Small-Cap ETF (SCHA).
E/R: 0.04%. This ETF tracks the Dow Jones U.S. Small-Cap Total
Stock Market Index.
|
| BNY Mellon US Small Cap Core Equity ETF (BKSE).
E/R: 0.04%. This ETF attempts to track the Morningstar US
Small Cap Index of small US companies.
|
| SPDR Portfolio S&P 600 Small Cap ETF (SPSM).
E/R: 0.03%. This ETF attempts to track the S&P SmallCap 600
Index of small US companies.
|
| Vanguard Small Cap ETF (VB).
E/R: 0.05%. This ETF is a share class of the Vanguard Small
Cap Index Fund (VSMAX).
|
| iShares Core S&P Small-Cap ETF (IJR).
E/R: 0.06%. This ETF tracks the S&P Small Cap 600 index.
|
| Vanguard S&P Small Cap 600 ETF (VIOO).
E/R: 0.10%. This ETF is a share class of the Vanguard S&P
Small Cap 600 Index Fund Institutional Shares (VSMSX).
|
| Vanguard Russell 2000 Index ETF (VTWO).
E/R: 0.10%. This ETF is a share class of the Vanguard Russell
2000 Index Fund Institutional Shares (VRTIX).
|
| DFA US Small Cap Portfolio (DFSTX). E/R: 0.27%. This
fund essentially tracks the CRSP 6-10 index, which is an index of all domestic
stocks whose market capitalization is in the bottom half of stocks traded on
the New York Stock Exchange. Given the above better alternatives, we see
little reason to buy this fund.
|
| Dimensional U.S. Small Cap ETF (DFAS).
E/R: 0.26%. This fund essentially tracks the CRSP 6-10 index,
which is an index of all domestic stocks whose market capitalization
is in the bottom half of stocks traded on the New York Stock
Exchange. The fund manages to minimize dividends.
|
| iShares Russell 2000 Fund (IWM).
E/R: 0.19%. This ETF tracks the Russell 2000 index.
|
| WisdomTree US SmallCap Earnings ETF (EES). E/R: 0.38%.
This is an ETF which tracks the WisdomTree SmallCap Earnings Index. This
index is built by removing the 500 largest (by market cap) companies in the
WisdomTree Earnings Index of positive earnings companies and then
removing the 75% largest market capitalization companies of those remaining.
The index weights the remaining companies by the cash value of their earnings.
The WisdomTree SmallCap Earnings Index is a non-cap weighted index
of US small cap stocks. The high expense ratio and relative
illiquidity costs (i.e., bid-ask spreads) of new ETFs such as this
cause us pause at this time. Further, we are concerned that
this fund holds a relatively large percentage of its assets in REITs
(which we consider to be a separate asset class) and the stocks that
the fund buys simply aren't very small.
|
| WisdomTree US SmallCap Dividend ETF (DES). E/R: 0.38%.
This is an ETF which tracks the WisdomTree SmallCap Dividend Index. This
index is built by removing the 300 largest (by market cap) companies in the
WisdomTree Dividend Index of regular dividend paying companies and then
removing the 75% largest market capitalization companies of those remaining.
The index weights the remaining companies by the cash value of their dividend
payouts.
The WisdomTree SmallCap Dividend Index is a non-cap weighted index
of US small cap stocks. The high expense ratio and relative
illiquidity costs (i.e., bid-ask spreads) of new ETFs such as this
cause us pause at this time. Further, we are concerned that
this fund holds a relatively large percentage of its assets in REITs
(which we consider to be a separate asset class) and the stocks that
the fund buys simply aren't very small.
|
| Invesco FTSE RAFI US 1500 Small-Mid ETF (PRFZ).
E/R: 0.39%. This is an ETF which tracks the FTSE RAFI 1500 US
Small-Mid Index, a non-cap weighted index of US small cap stocks. |
| Invesco S&P SmallCap Momentum ETF (XSMO).
E/R: 0.37%. This fund attempts to track the S&P SmallCap 600
Momentum Index . This index starts with the S&P 600. It takes
the 20% highest momentum stocks thereof. Then it weights the stocks by
the product of their market capitalization and their momentum score.
This gives a very momentum-y portfolio which might have somewhat less
turnover than one that didn't include market capitalization in its
weighting.
|
| Invesco DWA SmallCap Momentum ETF (DWAS).
E/R: 0.60%. This fund attempts to track the Dorsey Wright SmallCap
Technical Leaders Index. This index uses a proprietary process to
select small cap securities which demonstrate powerful relative strength
characteristics based on the company's market performance. For more
information on momentum investing, see
here.
|
| AQR Small Cap Momentum Style Fund (ASMOX). E/R: 0.60%.
This fund invests in small cap momentum stocks (i.e., small-cap stocks that
have done well over the past 12 months, excluding the most recent month).
Momentum has been shown to have both a positive risk premium and a negative
correlation with the value premium. Thus, momentum stocks are good
diversifiers to value stocks. As such, this fund is most appropriate
for those who are using it to both get small cap exposure and to diversify
value exposure elsewhere in their portfolio. This fund is managed to
minimize short-term capital gain distributions. For more
information on momentum investing, see
here.
|
| Avantis U.S. Small Cap Equity ETF (AVSC).
E/R: 0.25%. This ETF buys small cap stocks with a tilt towards
profitability.
|
| iShares Microcap Index Fund (IWC).
E/R: 0.60%. This ETF tracks the Russell Microcap Index (the 1000
smallest stocks of the Russell 2000 index, plus the next 1000 largest stocks
smaller than those in the Russell 2000 index). We expect the NAV-mkt
tracking error to be quite large for this fund, due to the extreme
illiquidity of the underlying stocks.
|
| First Trust Dow Jones Select MicroCap Fund (FDM). E/R:
0.60%. This ETF tracks the
Dow Jones Select Microcap Index. We expect the NAV-mkt
tracking error to be quite large for this fund, due to the extreme
illiquidity of the underlying stocks.
|
| Dimensional U.S. Small Cap ETF (DFAS).
E/R: 0.26%. This fund essentially tracks the CRSP 6-10 index, which is
an index of all domestic stocks whose market capitalization is in the bottom
half of stocks traded on the New York Stock Exchange. The fund manages
to minimize dividends.
|
| Vanguard Small Cap Index Fund Admiral Shares (VSMAX). E/R: 0.05%.
This
fund tracks the CRSP US Small Cap Index.
|
| Schwab U.S. Small-Cap ETF (SCHA). E/R:
0.04%. This ETF tracks the Dow Jones U.S. Small-Cap Total Stock Market
Index.
|
| BNY Mellon US Small Cap Core Equity ETF (BKSE).
E/R: 0.04%. This ETF attempts to track the Morningstar US Small Cap
Index of small US companies.
|
| SPDR Portfolio S&P 600 Small Cap ETF (SPSM).
E/R: 0.03%. This ETF attempts to track the S&P SmallCap 600 Index of
small US companies.
|
| Vanguard Small Cap ETF (VB). E/R:
0.05%. This ETF is a share class of the Vanguard Small Cap Index Fund
(VSMAX). However, unlike other ETFs, Vanguard ETFs are only as tax
efficient as their underlying fund, no more and no less.
|
| iShares Core S&P Small-Cap ETF (IJR).
E/R: 0.06%. This ETF tracks the S&P Small Cap 600 index.
|
| Vanguard Tax-Managed Small-Cap Fund Admiral Shares (VTMSX). E/R:
0.12%. This fund tracks the S&P Small Cap 600 index while minimizing capital gains.
|
| Vanguard S&P Small Cap 600 ETF (VIOO).
E/R: 0.10%. This ETF is a share class of the Vanguard S&P Small Cap
600 Index Fund Institutional Shares (VSMSX). However, unlike other
ETFs, Vanguard ETFs are only as tax efficient as their underlying fund, no
more and no less.
|
| Vanguard Russell 2000 Index ETF (VTWO).
E/R: 0.10%. This ETF is a share class of the Vanguard Russell 2000
Index Fund Institutional Shares (VRTIX). However, unlike other ETFs,
Vanguard ETFs are only as tax efficient as their underlying fund, no more
and no less.
|
| iShares Russell 2000 Fund (IWM). E/R:
0.19%. This ETF tracks the Russell 2000 index.
|
| WisdomTree US SmallCap Earnings ETF (EES). E/R: 0.38%.
This is an ETF which tracks the WisdomTree SmallCap Earnings Index. This
index is built by removing the 500 largest (by market cap) companies in the
WisdomTree Earnings Index of positive earnings companies and then
removing the 75% largest market capitalization companies of those remaining.
The index weights the remaining companies by the cash value of their earnings.
The WisdomTree SmallCap Earnings Index is a non-cap weighted index of US
small cap stocks. The high expense ratio and relative illiquidity
costs (i.e., bid-ask spreads) of new ETFs such as this cause us pause at
this time. Further, we are concerned that this fund holds a relatively
large percentage of its assets in REITs (which we consider to be a separate
asset class) and the stocks that the fund buys simply aren't very small.
|
| WisdomTree US SmallCap Dividend ETF (DES). E/R: 0.38%.
This is an ETF which tracks the WisdomTree SmallCap Dividend Index. This
index is built by removing the 300 largest (by market cap) companies in the
WisdomTree Dividend Index of regular dividend paying companies and then
removing the 75% largest market capitalization companies of those remaining.
The index weights the remaining companies by the cash value of their dividend
payouts.
The WisdomTree SmallCap Dividend Index is a non-cap weighted index of US
small cap stocks. The relative illiquidity costs (i.e., bid-ask
spreads) of new ETFs such as this cause us pause at this time.
Further, we are concerned that this fund holds a relatively large percentage
of its assets in REITs (which we consider to be a separate asset class) and
the stocks that the fund buys simply aren't very small.
|
| Invesco FTSE RAFI US 1500 Small-Mid ETF (PRFZ).
E/R: 0.39%. This is an ETF which tracks the FTSE RAFI 1500 US
Small-Mid Index, a non-cap weighted index of US small cap stocks. |
This web page contains the current opinions of Eric E. Haas at the time it is
written—and such opinions are subject to change
without notice. This web page is intended to serve two purposes:
| To educate the public; and |
| To provide disclosure of Mr. Haas' opinions to prospective clients.
We believe that prospective clients are well-served by being made aware of
what they are buying—and what they are buying is advice
that is based on these opinions. |
We believe the information provided here to be useful and accurate at the time
it is written.
Information contained herein has been obtained from sources believed to be
reliable, but is not guaranteed.
No investor should invest solely on the basis of information listed here.
Before investing, it is important to consult each prospective investment's
prospectus and consider both its risk/return characteristics and its effect on
your overall portfolio.
This information is not intended to be a
substitute for specific individualized tax, legal, or investment planning
advice. Where specific advice is necessary or appropriate, Altruist
recommends consultation with a qualified tax adviser, CPA, financial planner, or
investment adviser. If you would like to discuss the rationale or support
for any particular idea expressed on this web page, feel free to
contact us. |
